FDIC to rescue

but for how long?

With many more institutions expected to fail, insurer itself may run out of funds

September 26, 2008|By David Evans, BLOOMBERG NEWS

Deborah Horn tugs on the handle of the glass-paned entrance of the IndyMac Bancorp Inc. branch in Manhattan Beach, Calif. The door won't budge. The weekend is approaching, and Horn, 44, the sole breadwinner in a family of three, needs cash.

A small notice taped to the window on this Friday afternoon tells her why she's been locked out. IndyMac has failed, the single-spaced, letter-sized paper says; the bank is now in the hands of the Federal Deposit Insurance Corp.

"The Receiver is now taking possession of the Bank," the sign reads.

"I'm physically shaking," said Horn, an academic tutor, as she peered into the bank. Inside, an FDIC examiner was talking to six stone-faced IndyMac employees.

"I don't know when I'm going to be able to get my money," Horn said. "I'm a single mom. This is the money I live on."

Don't worry about Horn. She'll be all right. That's because the FDIC, created in 1934, insures all accounts up to $100,000 at its member banks, and it has never failed to honor a claim. The people to worry about are U.S. taxpayers.

The IndyMac debacle is taking a large bite out of FDIC reserves, and if scores of other banks fail in the year ahead, the fund will be depleted. Taxpayers will have to step in.

Americans had gotten used to the idea that bank failures were as rare as a Category 5 hurricane. No banks went bust in 2005 or 2006. Seven collapsed in 2007 as the credit crisis began to exact a toll. So far in 2008, 12 more, with total assets of $42 billion, have fallen -- that's the worst wave of bank failures since 1992.

IndyMac, which had $32 billion in assets when it went into receivership, is the most expensive bank failure the FDIC has ever covered. And that record may not stand for long.

By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, Calif.-based firm that sells its analysis of FDIC data to investors.

"It's not going to be Armageddon," said Mark Vaughan, a financial economist at the Federal Reserve Bank of Richmond, Va., and a senior lecturer in economics at Washington University in St. Louis. "But it's going to be bad."

The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won't disclose their names because doing so could cause depositors to panic and pull out their funds.

It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue by lending money to the FDIC.

Emergency federal lending to the FDIC could swell the cost of government rescues of financial institutions to more than $400 billion, not including the $700 billion general Wall Street bailout now under discussion in Congress. Under federal statute, the FDIC must pay back any loans from the Treasury.